Write-down of shares and investment certificates depending on stock market price

In two recently published decisions (case reference: I R 89/10 and I R 7/11), the Federal Tax Court (BFH) has clarified and confirmed its previous case law regarding the write-down of listed securities; the decisions deviate from the current administrative guidance published by the tax authorities.

Under the valuation principles in the Income Tax Act, assets may be written down only if there is a permanent decline in value. According to the Federal Ministry of Finance (BMF), such permanent impairment in value is presumed if the stock market price of the relevant listed shares (or redemption price in the case of fund shares) has fallen by more than 40 % below the historic acquisition costs of the taxpayer or if it has fallen by more than 25 % below the historic acquisition costs on the current balance sheet date and the previous balance sheet date.

The BFH has now held that a permanent impairment in value of publicly traded shares typically can be presumed if at the balance sheet date, the value of the shares has dropped by more than 5 % as compared to the historic acquisition costs. In the BFH’s view, the relevant date is the date of the financial statements rather than the date the financial statements are prepared.

The BFH also held that a general and simplifying approach is necessary because an examination of the likely future development of the stock prices on a case-by-case basis would overwhelm both the tax authorities and taxpayers. Therefore, in the interest of simplicity and equality, the market price at the balance sheet date generally should be applicable for the determination of a potential write-down. Exceptions may apply if the market price does not reflect the actual value of the shares (e.g. if the trading volume of the shares is extremely low).

Since write-downs of shares are no longer tax deductible for taxpayers that do not qualify as financial institutions (unlike in the years under review by the Federal Tax Court where write-downs were still tax deductible), it can be expected that the ability to take such write-downs for tax purposes will no longer be an area of focus of the tax authorities and taxpayers. On the contrary, taxpayers generally will prefer not to write down shares in corporations – where possible under the tax and accounting rules – because such write-downs will not be tax deductible, and a potential recapture would trigger a 5 % inclusion at the level of the taxpayer.

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